Fed said to weigh forcing foreign banks to add U.S. capital

U.S. units of foreign lenders including Deutsche Bank AG may be required by regulators to comply with tougher capital rules that some banks sought to skirt, three people with knowledge of the discussions said.

The Federal Reserve, drafting standards for the nation’s largest banks, may force non-U.S. firms to house all of their U.S. businesses, including securities trading, within a regulated holding company, said the people, who requested anonymity because the rules haven’t been completed. That means local units would have to bolster capital in the U.S. to guard against losses regardless of their parents’ resources.

Deutsche Bank and London-based Barclays Plc have changed their U.S. legal status in the past two years to discard the holding-company structure. The treatment could force foreign banks to inject capital into their U.S. units and limit their ability to move funds across borders, said Luigi De Ghenghi, a partner at law firm Davis Polk & Wardwell LLP in New York.

“Fragmenting capital along regional lines will impose real costs on doing cross-border banking,” said De Ghenghi, a member of the firm’s financial-institutions group. “Global banks will risk ending up with overcapitalized units all around the world because regulators are reluctant to allow the repatriation of capital once it’s moved to their jurisdiction.”

Seizing Assets

The Fed’s move fits with a worldwide trend of increasing local supervision powers, according to Barbara Matthews, managing director of BCM International Regulatory Analytics LLC, a Washington-based consulting firm. Regulators are moving in that direction because of the failure to agree on a cross-border resolution framework for globally active banks, she said.

“So when the next crisis hits, you can seize the assets of the local unit and prevent its liquidity from fleeing your jurisdiction,” Matthews said.

The Fed provided $538 billion of emergency loans to the U.S. units of European banks during the financial crisis, almost as much as it did to U.S. firms. That increased political pressure on lawmakers and regulators to tighten rules for all.

Foreign lenders currently can choose whether to create U.S. bank holding companies. Those units were exempt from capital standards as long as their parent firms were well-capitalized. The 2010 Dodd-Frank Act removed that exemption. Some non-U.S. lenders then altered their legal structures to remain outside the scope of local capital rules.